Look Past Record-Low Volatility and See Investors Aren't Really AsleepBy
VStoxx drops to lowest ever but vol of vol index is surging
Biggest tail risk is central-bank mistake, BofAML survey finds
The gauge tracking volatility in European shares may have just hit its lowest level ever, but that doesn’t mean investors are placid.
While the VStoxx Index -- which measures swings in the Euro Stoxx 50 gauge -- has slumped almost 40 percent this year, the region’s Volatility-of-Volatility Index has surged more than 25 percent. It now trades near a record high relative to the VStoxx, signaling that investors are paying up to hedge against turbulence in the market.
So what are some of the concerns in investors’ minds? Well it’s not Catalonia or Brexit, according to Bank of America Merrill Lynch. Instead, a survey from the bank published Oct. 17 showed that central-bank policy mistakes were seen as the biggest tail risk. That may be food for thought before the ECB gathering on Oct. 26.
To be sure, the expiration of some VStoxx futures on Wednesday may be accentuating the index’s move, while trading of options on the gauge has fallen since reaching a record before the French presidential election. And the trend is not unique: in the U.S., the Cboe VVIX Index is near a peak versus the VIX.
Still, Florent Brones, the chief investment officer at BNP Paribas Wealth Management, says that even though many positive elements are supporting euro-area equities, there’s no exuberance in the market.
— With assistance by Blaise Robinson